Held to Account: Governance in the World Economy

(Seminar #2)

Professor Woods began her discussion by spelling out two practical dilemmas faced by multilateral economic organizations such as the International Monetary Fund (Fund), the World Bank (Bank), and the World Trade Organization (WTO). The first practical dilemma, which she referred to as the “crisis of effectiveness,” concerns the increasing incapacity of these institutions to perform the tasks with which they are charged. This crisis, she suggested, is due to three main developments. The first is the varying commitment of the most powerful member states to the pursuit of the stated mandates of these institutions. The second consisted in the failure of these institutions to get economically weaker countries to implement the policies that they typically request of them. The third relates to the relative powerlessness of these institutions to regulate many aspects of the global economy, such as the structure of transnational enterprises, capital markets, and other private sector actors, even while their mandates appear to require that they be capable of doing so.

The second practical dilemma, which she referred to as the “crisis of legitimacy,” concerns the fact that rules and institutions governing the global economy are often perceived to be illegitimate, perhaps even “coercively imposed” without the consent of substantial segments of the world’s population. Indeed, the fact that markets have become increasingly global, while the kinds of institutions that could fairly and effectively govern them have remained national or local, has often been cited as the most pressing obstacle to achieving justice in the global economy. Decisions that are made individually by states to license arms sales, permit deforestation, extract nonrenewable resources, or raise interests rates, for example, affect many that play little or no role in making or influencing them. Moreover, states have become increasingly vulnerable to external intervention even in matters of domestic governance, directly— since financial crises and state failures lead them to accept economic conditionality and external intervention––and indirectly—since weak governments face strong incentives to cater to the interests of more powerful states and their constituents. Insofar as the legitimacy of institutions and policies depends (at least in part) on the political role that those who are affected by them are allowed to play in shaping them, these developments are quite problematic. Indeed, just as democracy seems to have been seized upon as the most legitimate form of political decision-making, participation in the politics of the nation-state seems to have become woefully inadequate to secure the full participatory rights of individuals. People are quite substantially affected by many political decisions that are made outside of the nation-states in which they live.

Professor Woods’s talk, and the discussion that followed, focused primarily on this second dilemma.

The Argument

Remedying people’s inability to participate meaningfully in the determination of rules and institutions that affect their livelihoods will require developing rules and institutions that ensure that, even where persons cannot participate directly in decision-making, their interests are adequately represented. Existing international organizations, such as the Fund, the Bank, and the WTO, are partly accountable to states, which (ideally) represent the interests of their citizens. But their shape is fixed largely through intergovernmental bargaining that overrepresents the interests of the more powerful states. This is due to the fact that their voting and other decision-making procedures are often inappropriately dominated by richer countries (in the Fund and the World Bank), and because these countries also strongly influence the scope of the tasks with which these institutions are charged. There are thus two distinct democratic deficits in the Bretton Woods institutions. Many people have little influence on the decisions made in their name by the centralized organs and agencies of these institutions. But these people also have very little meaningful influence on the design of these institutions, and the range of tasks with which they are charged. One means of addressing these problems, Professor Woods argued, is to focus on how the mechanisms that ensure the accountability of decision-makers in these institutions can be strengthened and improved.

She began by stating three main normative presumptions of her argument about how the second dilemma should be tackled. The first normative presumption was that, insofar as institutions are charged with mediating different claims, they must be held accountable to those upon whom their decisions affect or bind. The second normative presumption was that, in order to be legitimate, institutions must have some claim to have received the consent of those that they govern and substantially affect. The more intrusive any particular institution becomes into the structure of economic life within a country, for example, the stricter become the requirements that it acts with the consent of that country’s population. The third normative presumption was the principle of subsidiarity, which regulates the allocation or the use of authority within a political order in which there is no unitary sovereign, holding that that authority should rest at the most local and democratic level possible and should not be delegated to higher levels unless absolutely necessary.

To these three presumptions were added three qualifications. First, the argument is directed only at questions concerning the legitimacy of formal multilateral international organizations, and would leave aside the important issue of how the broader framework of global economic rules should be reformed. Second, the goal of achieving accountability is not an infinite quest—there can be too much accountability. In addition, attempting to promote accountability can be counterproductive if the costs of increased accountability are unfairly distributed. Third, the project of making existing organizations more accountable should not be seen as a means of increasing their mandate. These institutions must simultaneously be made more accountable and have their mandates trimmed back in a way that matches their capabilities.

Having stated these important presumptions and qualifications, Professor Woods distinguished four kinds of accountability gaps and failures in these institutions, and offered proposals for how each might be remedied.

Constitutional Accountability

Currently, these institutions have evolved without the full consent of their membership; the processes used for decision-making demonstrate a lack of consent, as exemplified by the U.S. veto power in the Fund and the Bank. Although the Articles of Agreement in the Fund and the Bank preserve a sense of collective agreement by providing that special majorities be required for significant decisions, the special majority of 85 percent endows the United States with a veto. This veto power, along with discretion over additional resources, has been used by the United States to manipulate each institution, leaving the institutions looking inadequately accountable––constitutionally and politically––to their other members.

Changes in the voting structure and a reduction in the categories of decision that require a special majority would be one way to improve the constitutional accountability of the organizations. A second would be to make executive directors from all countries as answerable to their governments as the United States executive director is (which would require more direct representation of developing countries). A third measure would be to ensure that expansions in the mandate of either the Bank or the Fund are overseen by an international oversight body which can ensure that new tasks or conditionalities do not overlap with or contradict the work of other international organizations.

Political Accountability

When the Fund and the Bank were formed over fifty years ago, the structure of their governing boards—made up primarily of finance ministries’ and central banks’ officials—was appropriate, given the narrow functions of the institutions. Today, however, the institutions have entered a more political realm. Either their political role needs to be rolled back, or their structures of representation and accountability need to be improved.

To achieve this, Professor Woods argued, the governing boards should comprise heads of state, which are the only national actors who can reconcile diverse claims of different agencies and interest groups. If an agreement with the Fund or Bank extends beyond the remit of a Central Bank or Finance Ministry—e.g. into issues of health or education—government agencies that work in those areas must have their responsibilities and needs taken into account. At the same time, the executive boards of the Fund and the Bank should be much more publicly accountable for political decisions they make. This requires greater clarity in decision-making within each institution.

Member states delegate their power to directors who sit on an executive board, but these directors fail to perform the core functions of a board, such as overseeing the functions of the institution. Rather, they passively receive staff proposals, which they then must support or deny. The deliberation and decisions of particular board members is not made public. This system leads to a blurring of responsibility; e.g., it is unclear which members of the board are supporting these proposals, and whether responsibility for them should be attributed to the board itself or to the staff members who introduce them.

Accountability demands greater clarity about who is doing what—otherwise, there is no way of knowing what executive directors are doing in the name of their countries’ citizens. To remedy these problems, Professor Woods proposed that the boards have a documented and published voting process, as well as a record that shows a justification for decisions and a thorough consideration of alternatives, similar in form to the opinions that are released by court judges. Executive directors would then become clearly accountable for their decisions and the policies that result from them. Staff, on the other hand, should come to the board with different options, and be held accountable for the quality of proposals on the table, but not for the policies chosen. These reforms would establish a clear distinction between political decisions (taken by the board) and technical alternatives (offered by the staff).

Internal Accountability

The senior management in each the Fund and the Bank play a number of crucial roles. Yet procedures for nominating and electing these institutions’ presidents exclude most countries. The president of the Bank is proposed by the United States, and European countries propose the managing director of the Fund, with his or her deputy being proposed by the United States. Professor Woods argued that a good first step in bolstering accountability would be to implement a selection procedure for all senior management that is both representative of all members and meritocratic so as to reflect both the political legitimacy of the organization and its technical competence. In addition, she emphasized the need for clear and public operating rules and procedures within the organizations, and ways that outsiders can ensure officials adhere to these rules and procedures. One possible means of doing this is through the creation of an ombudsman, who could play an active investigative role, particularly in monitoring the new conditionality guidelines that have recently been issued by the Fund.

Financial Accountability

There are three ways in which international financial institutions need to be financially accountable. First, they need to be accountable for their own budgets and the use of their net income. In both the Fund and Bank, money spent on administration, staffing, buildings and so forth increases the charges borrowers must pay for using the institution’s resources. Yet there is little accountability with respect to these expenditures and the significant strategic decisions that incur them. A second category of financial accountability concerns each institution’s lending and the conditionality attached to loans. How costly has the implementation of conditionality been? Has it achieved the expected goals? At present the Bank’s OED reviews the performance of Bank loans but several important gaps remain. A third element of financial accountability relates to the special activities undertaken by the Fund and Bank: concessional lending by separately contributed funds such as Trust Funds, the International Development Agency (IDA), the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB).

At present there is too often a conflation among the different tasks the institutions perform. The Bank, for instance, performs two substantially different tasks for its members. First, it “aids” its members by lending to them at conditional rates through the IDA, which is funded by periodic donor contributions. In this task, Professor Woods argued, one can see the case for accountability back to these donors. The main function of the Bank, however, is to offer loans at market interest rates but in areas where private sector investors would not necessarily be prepared to lend. With respect to this function, the borrowing members of the Bank can justifiably take a more robust role in determining how the net income accruing from the charges they pay for borrowing is spent. It is far from clear that the largest donor contributors should play such a significant role in decisions concerning this function. Financial accountability, she argued, should be based on actual contributions for specific activities rather than generalized and blurred across different functions.

Discussion

The following highlights some of the many interesting questions that were raised during the discussion period following Professor Woods’s presentation.

Are these institutions irredeemably flawed?

One participant commented on Professor Woods’s assertion that the governance structures in the Fund and Bank should be altered to fit the institutions’ expanded mandates, and wanted to know how her proposals would actually make the institutions more accountable to the people whom they affect. The participant argued that when these institutions have policy discussions, developing country executive directors often do not participate because to do so can be politically dangerous. Because Fund officials and representatives of developed countries know which members support certain measures, developing country representatives have strong incentives to avoid the unfavorable political consequences of casting dissenting votes. Furthermore, those who oppose particular decisions but who represent constituencies that have Fund loans pending often do not want to raise their voices. In response to Professor Woods’s question, “Where to make policy?” the participant argued that policy decisions must be made somewhere other than in the management and governance structures of the Fund and the Bank (in the UN, for instance), and suggested that trying to democratize these institutions would be hopeless.

Professor Woods noted her starting presumptions—that the institutions should be less intrusive and more accountable for what they do. Executive directors from developing countries need more voice, more capacity to exercise their voice, and more voting power to underpin their participation. Beneath this, accountability within the institutions requires greater clarity of who makes decisions about what. Professor Woods cited the Fund and the Bank’s work on debt relief for the Heavily Indebted Poor Countries (HIPC) as an example of how a blurred decision-making process circumvents accountability. Prior to any board discussions on HIPC, the technical staff within the Fund and the Bank did a great deal of work on debt relief and on the various consequences that different allocations of money would have. This work, however, was quickly submerged under the reiterative process of decision-making when it became clear that the boards and the G-7 were committed to allocating only a certain amount of money toward HIPC. At this point, the staff tailored proposals to fit that figure, and accountability became lost in the process. Instead, the process should have been clear and transparent. The technical staff put three proposals to the board—one cheap, one middle-range, and one expensive. The board should have made its political decision (to opt for the cheap proposal with all of its flaws) openly. In reality, the process blurred the functions and accountability of the board and the staff.

Should “exit” options be enhanced?

A second participant pointed out that any such discussion of legitimacy and accountability should also consider the monopoly that financial institutions exercise in the world economy. The Bank and the Fund advise countries regularly that competition is good for efficiency and innovation, yet they do not practice that particular doctrine themselves. One would think that a plurality of institutions competing with one another to offer services in finance, while each applying different doctrines, would lead to efficiency. Albert Hirschman’s distinction between exit and voice is particularly helpful in understanding the rationale for increased participation: Where people or groups do not have exit—that is, where they do not have the opportunity to choose another provider—is where they need voice. Therefore, the lack of participatory opportunity in current global institutional arrangements seems to present a very serious problem because of the monopolistic character of these institutions.

Woods agreed, noting that there are several functions of the global economy that could be much more competitive. Policymakers in Washington and Europe, however, fear that if other organizations become too powerful, they will lessen the G-7’s voice. This fear was particularly evident over the Asian monetary funds. In an ideal situation, there should be competition, but unfortunately political realities prevent this from happening.

A monopoly on ideas?

In light of the fact that international financial institutions often receive criticism for appearing to disregard the interests of activists, the poor, and the less powerful, one participant wondered whether the Bank and the Fund might operate on any ideologies other than their own. When institutions appear to ignore the voices of those outside the financial community, proposals such as Woods’s might be wishful thinking. The participant asked how the Bank and the Fund might be better encouraged to fulfill what seems to be a vast knowledge deficit about possible alternatives, and where the institutions might find such alternatives.

Professor Woods described two kinds of knowledge, each at the opposite end of a spectrum. On the one end is universal knowledge, which institutional staff, management, and executives believe allows them to generate state-of-the-art prescriptions for the whole world. At the other end of the spectrum is local knowledge, which fits with the idea that every economy works in unique ways, and that institutions such as the Fund and the Bank are irrelevant. In Professor Woods’s view, these institutions are presently not as near the first end of the spectrum as the participant may think, but actually more towards the middle. Even if unpopular, such institutions cannot operate by coercive power alone, because their instruments of coercion are limited. Therefore, they must also operate to some degree by persuasion, meaning that they must take into account the ideas of people. To the extent to which institutions have to work by persuasion, then, there is room for maneuver and debate about alternative ideas of global economic governance.

Might increased accountability be counterproductive?

One participant wondered about the potential problems that might result in trying to force transparency on institutions that are already by nature schizophrenic—they are designed as action-oriented organizations intended to fight poverty, but in fact are also political organizations that have to answer to the demands of their donors. It is therefore possible that pushing greater transparency will lead the institutions to perform even less well because of the decoupling between their political and the action-oriented functions.

Professor Woods warned of the dangers in creating gold-plated projects. She asked participants to imagine an “NGO-proof” project for which the Bank would have to undertake exhaustive investigations into the project’s environmental impact, its human rights impact, and other potential effects. In order to devote the resources necessary to make one particular project perfect, the Bank risks pushing other valuable projects aside, and would fail to fulfill its mandate in the process. According to Professor Woods, running the risk of gold-plating projects demonstrates bad accountability. However, this should not be construed to mean that accountability is itself bad. She advocates a well-conceived form of accountability that starts from the conception that these institutions have clear and organized mandates and that they have a duty to their membership in the fulfillment of their objective.

A second-best solution?

While some participants argued that Professor Woods’s proposals for reform might border on the unrealistic and unattainable, another participant wondered whether her proposals were asking for enough change. Given the level of disagreement over justice, development strategy, and the effectiveness of policies, it is especially important that the actions of institutions be seen as legitimate. Therefore, the participant suggested, perhaps the best solution is the one put forth by an earlier participant who commented on the monopoly of the Bank and the Fund and advocated a system of competing development organizations whose funding is depoliticized. Perhaps this would be the ideal solution, and the proposals put forth by Professor Woods—which seek to shrink the scope of these institutions or to match their accountability with their current structures—are a second-best option.

Professor Woods conceded to the suggestion that proposals for reform can often be a second-best solution. While she believes in ideal theory and its value as a yardstick against which to measure reality, Woods approaches such ideals with caution because it is often difficult to determine to whom these ideals really belong. When thinking of the people whose interests are at stake—i.e., populations of developing countries—Woods finds that the ideal that sounds and looks the best often does not come from those people. Therefore, while a political theorist may see a failure of creative imagination in choosing the second-best option, one shouldn’t underestimate how important various procedural issues are to the people whom the institutions affect, and that working even modestly to improve such procedures can contribute to significant change.